Istisna'a

Introduction
Istisna'a’ is sale transaction where commodity
is transacted before it comes into existence.
Definition
It is an order to producer to manufacture a
specific commodity for the purchaser.
Conditions of Istisna'a
(1)the subject of Istisna'a is always a thing
which needs manufacturing
(2)Manufacturer use his own material
(3)Quality and Quantity should be agreed in
absolute term
(4)purchase price should be fixed with mutual
consent
Price of Istisna'a
• price of Istisna'a may be in the form of
money,commodity and usufruct.
• Price of Istisna'a may be spot and differed therefore
Istisna'a is applicable where Salam is not applicable.
• Price of Istisna'a can be paid in installments.
• The installments may be tied up with different stages of
projects.

Option
When the required goods have been manufactured by
the manufacturer purchaser can exercise his option of
defect, but he cant use his option of seeing,
 Revoking of Istisna'a

• The contract of Istisna'a can be cancelled

unilaterally before the manufacturer starts
working.
• After starting the work, Istisna'a cannot be
cancelled unilaterally.
 Difference between Istisna’ & Salam
ISTISNA SALAM
• The subject of Istisna'a • The subject can be any
is always a thing which thing.
needs manufacturing.
• The price in Istisna'a • The price has to be
does not necessarily paid in full in advance.
need to be paid in full
in advance.
 Difference between Istisna’ & Salam
ISTISNA SALAM
• Time of Delivery does • Time of delivery is an
not have to be fixed essential part of the
sale
• The contract can be • The contract cannot
cancelled before the be cancelled
manufacturer starts unilaterally.
working.
 Difference between Istisna’ & Ijarah
ISTISNA IJARAH
• The manufacturer The material is provided
either uses his own by the customer and
material the manufacturer uses
only his labor and skill.
Security

• A security in form of a guarantee, mortgage or

hypothecation may be required for Istisna'a in order to
ensure that the manufacturer shall deliver the
commodity on the agreed date,
in the case of default in delivery,the guarantor may be
asked to deliver the same commodity,and if there is a
mortgage,the buyer can sell the mortgaged property
and the sale proceed can be used either to realize the
required commodity by purchasing it from the
market,or to recover the price advanced by him.
• Bank cannot recover the principle and profit from sale
proceeds of security.
Time of Delivery

It is not necessary in Istisna'a that the time of delivery

is fixed. However, the purchaser may fix a maximum
time for delivery after the appointed time, he will not be
bound to accept the goods and pay the price.
In order to ensure that the goods will be delivered
within the specified period, some modern agreement
of this nature contain a penalty clause to the effect that
in case the manufacturer delays the delivery after the
appointed time,the price shall be reduced by a
specified amount per day.
Delivery of Manufactured goods

• Before delivery, goods will remain at the risk of seller.

• After delivery, risk will be transferred to the
purchaser.
• Possession of goods can be physical or constructive.
• Transferring of risk and authority of use and
utilization/consumption are the basic ingredients of
constructive possession.
• If manufactured goods are delivered before agreed
date, purchaser can refuse to accept the goods.
 Parallel Istisna'a and its applications

After the execution of Istisna'a agreement with one party, buyer

or seller executes another Istisna'a agreement with third party,

Conditions for Parallel Istisna'a :

(a) there must be two different and independent contracts, these

two contracts cannot be tied up and performance of one should
not be contingent on the other.

(b) Parallel Istisna'a is allowed with third party only.

 Parallel Istisna’a Diagram
1st Istisna'a 2nd Istisna'a
Manufacturer Purchaser
Parallel
Istisna'a Istisna'a
Sale

Delivery of Delivery of
Commodity Commodity

Islamic Bank Islamic Bank

Purchaser Seller
 Potential of Istisna'a

The client can get finance for raw material,

working capital and other overhead expenses
by the execution of Istisna'a agreement.

House financing, import and export products can

be easily designed on Istisna'a basis.
 Istisna as Mode of Financing

• House Financing
• Project Financing
• BOT Arrangement
• Export Pre Shipment
 Rs. 5 million
+ Rent Over a period
of 10 years
Deferred

Rs. 5 M DIMINISHING MUSHARAKA Rs. 2 M CUSTOME

BANK
R
Spot

(ISTISNA)
Rs. 7 M
Spot

CONTRACTOR
 Rs. 110 M
(EXPORT PROCEEDS)
Deferred

Rs. 100 M (ISTISNA) CUSTOMER

BANK
Spot

Agent
EXPORT Rs. 110 M
 Builder Rs.120 M Bank Rs 100 M Contractor

Deferred Spot

Sale of Building
(Flats or Offices) Receivables Assigned
for Rs.120 M to Bank
Plus Profit
GOP/ Customer Rs.120 Million Bank Rs 100 Million Contractor

Deferred Spot
Receivables / Regular Income
Assigned to the Bank
JAZAK ALLAH